Top 7 Benefits of a Written Partnership Agreement

What is a Partnership:

A partnership is a business that is co-owned by two or more people which has not been formed as a corporation, limited liability company or other entity.

What is a Partnership Agreement:

A partnership agreement (“Agreement”) is a written agreement stating the terms of operation for the partnership. According to the Partnership Act 1890 (the “Act”), a partnership may automatically come into existence when multiple parties together are “carrying on a business in common with a view of profit”. Although not required, having a written agreement is in each of the partners’ best interest as the Agreement serves to protect the interests of each partner as well as the interests of the business. The Agreement is only enforceable if it is in writing and signed by all partners.

Partnership Agreements Usually Includes

Name of the partnership, details of the partners and their designations

Business activities

Management of the partnership

Decision Making

Meetings of the partners

Capital Contributions

Profit distributions

Financial reporting & taxation methods

Transfers of partnership interests

Termination of the partnership

Resolution of disputes

Reasons to have a Partnership Agreement

Clarify the Nature of the Partnership
As stated above, the Act defines a partnership as a “relationship which subsists between persons carrying on business in common with a view of profit.” The Act does not clearly clarify what exactly is meant by “carry on business”. This leaves the interpretation up to each person and could potential cause disputes.

Assignment of Management Duties
By default, any partner is legally allowed to make a decision that would bind all the partners, even if the other partners have not approved the action. For example, one partner could take out a large loan in the name of the business which the business may not be able to afford. This in turn would put all partners at risk. With an agreement, limits can be put into place which would specify the partners who have authority to make certain decisions. Within management duties, the following should be clearly laid out for each partner:

Level of authority

Business decision-making power

Important management duties

Exact responsibilities

Avoid Unwanted Dissolution
Without an agreement, under the Act any one of the partners may dissolve the partnership without notice. The Act also states that unless the partners have agreed otherwise, the exit, death or bankruptcy of any partner automatically dissolves the partnership.

Removing Partners
If you wish to remove a partner, the default rules of the Act state that “no majority of the partners can expel any party,” making it impossible to remove a partner. On the other hand, an agreement can provide for the removal of a partner with clauses that include the necessary notice period and the grounds and motives for expulsion.

Limit Your Liability
Under the Act, all partners share equally in the liabilities of the business. Having an agreement will allow you to outline each partners’ level of liability. The level of liability depends on the amount each partner has invested into the business.

Sharing Profits
The default position under the Act is that all partners are deemed to share equally in the profits. What if one partners has put in more time and money into the business? The Agreement will divide the profits more fairly.

Avoid Costly Legal Proceedings
If for some reason a legal dispute should arise, partners can avoid expensive legal fees by providing in the Agreement alternative dispute resolution methods including mediation and arbitration.

These are not the only benefits to having a written partnership agreement. If you are looking to start a partnership or currently have one but don’t have a partnership agreement, contact one of our Gerbers Law business attorneys today at 920-499-5700 or send us a message. We will make sure that your agreement will protect the interests of each partner as well as the interest of the business.